Middle Kingdom at Middle Age

At the end of last year, we looked closely at the aging of the United States. Now is a good time to take a look at China’s demographics, and how the aging of that country feeds into the growth slowdown that appears to be swallowing the world.

My guide for this view is Nicholas Colas of the brokerage Convergex. He has unearthed quite a number of compelling data points and anecdotal evidence that explains why China will not be the engine of growth going forward that it was over the past 15 years.

Here is a lightly edited recounting of Colas’ view:

— “China surprisingly shares one key problem with many developed economies: demographics. Issue #1: China’s population is growing more slowly than the United States, India or Nigeria.

— “Issue #2: The average age of a Chinese citizen is climbing quickly.

— “Issue #3: The cause of China’s slow population growth and aging demographic profile is declining fertility rates, or the number of children born to women in the country.

— “Issue #4: China has a notable mismatch in the ratio of men to women, and this is most noticeable in live births in the last decade.

— “The upshot of all this data seems clear: China may be a growth economy, but it is not a particularly fast growing country. It faces a fast aging population without social benefits like Social Security or Medicare. Even with the recent scrapping of the one-child policy, it faces an uphill climb to get back to a fertility rate of 2.0, the required pace to stabilize the size of the population. Younger people, and the society as a whole, will face a greater challenge in tending to their elders than many developed countries better known for an aging population.

— “Much of the Western narrative related to China’s need for economic growth revolves around social stability. Citizens endure pollution, corruption, autocratic rule and more recently stock market volatility because there is an implicit social contract: increased living standards in return for all those challenges. And no doubt that the government has largely made good on its end of the bargain. China has lifted more people out of poverty in the last generation than any country in history.

— “Capital markets, however, only care about the future. The China economic story is more challenging than before because of the demographic profile outlined here. An aging and very slow growth population is a clear headwind. Also, older citizens demand a different social contract from the one they thought valuable when they were younger.

— “Westerners believe that ‘May you live in interesting times’ is an old Chinese curse; there is apparently no direct quote in China’s literature, however. Perhaps the country’s demographic challenges will eventually make it popular there.”

Bottom line for me: China needs to start occupying a different place in your mind as an investor than it did 20 years ago. Make sure to keep up with the reality, not just what you remember.

* *

Panic at the Disco

The database hounds that I like to quote for perspective are having a field day with the latest rout. Let’s see what we can glean.

Bespoke Investment Group reported that in the last two weeks of trading prior to Jan. 14, the S&P 500 has fallen 9%, capped with a 2.5% swan dive on Jan. 13. The analysts wanted to see how the market has performed in the past when it has experienced an extreme two-week drop that was capped off with a belly flop on the last day.

Above, they highlight two-week (10 trading day) periods since 1990 in which the S&P 500 fell 8%+ with a drop of 2%+ on the 10th day. As shown in the table, the S&P 500 has more often than not bounced following these nasty two-week periods. Specifically, it’s averaged a gain of 1.5% over the following week, and a gain of 2.3% over the following month. The latest was Aug. 24, and the one prior was October 2011, which launched a big rally. Most years featured rebounds, but don’t ignore the clunkers.

The 3.3% collapse on Jan. 13 pushed the Russell 2000 into an official bear market, which is a 20% decline from the prior peak. That ended the fourth strongest and third longest bull market for small-caps in the index’s six-decade existence.

The Bespoke table above lists every bear market for the Russell 2000 since 1980. For each, you can also see the length and amplitude. Of the 15 prior bear markets for the Russell 2000, the analyst reports that the average decline was 30.9% over an average of 191 calendar days. With the current bear market already clocking in at 204 days, Bespoke reports that it is not only already longer than average, but it already ranks as the sixth longest in the index’s history.

In terms of magnitude, if this bear market sees just an average decline from its high, that would translate to a downside target of 895, or 12% down from current levels, Bespoke notes. This is one reason why bears will continue to hover around the small-caps.

Best wishes,

Jon Markman

P.S. We are on the cusp of the most profitable bull market of our lifetime. Stocks will be driven higher by powerful global undercurrents that Wall Street will either ignore or fail to understand. As the Dow doubles, some stocks will see explosive gains of 300%, 400%, 500% and more. Savvy investors who make the right moves will become very rich!

Click here for Larry Edelson’s free report and to find out how it could make you rich beyond your dreams.

Jon began his career as editor, investment columnist and investigative reporter at the Los Angeles Times. As news editor, his staffs won Pulitzer Prizes for spot-news reporting in 1992 and 1994.

In 1997, Microsoft recruited Jon to help launch MSN’s finance channel, where he served as Managing Editor. In that capacity, Markman became the co-inventor on two Microsoft patents.

From 2002 to 2005, Jon served as portfolio manager and senior investment strategist at a multi-strategy hedge fund.

Mr. Markman is the author of five best-selling books, including Reminiscences of a Stock Operator: Annotated Edition; New Day Trader’s Advantage, Swing Trading and Online Investing.

{15 comments }

TimTuesday, January 19, 2016 at 8:01 am

Thanks for the perspective.

GordonTuesday, January 19, 2016 at 8:39 am

Yes thanks. I see Larry touting 31,000 again. You just cannot get gains like this out of thin air. Factories have to be built and people employed with wages high enough to spend its called consumer spending exactly what the Chinese want to accomplish by 2020 but sadly will fail. Robots will fill 8 million MORE jobs by 2020 and I think that figure is low. Robots buy nothing a non consumer. The newscaster stated that corporations must train their workers for the future ha ha ha that’s a rich one. Corporations don’t give a fiddlers you know about their workers there is no loyalty pensions guaranteed employment nada zilch nothing. Corporation are Nomads travelling the world looking for cheap labor strong governments to control said workers and weak pollution laws. Yes Larry after gold starts to move like you predicted I will take 31,000 out of the myth category and put into the longshot column. Its also earnings week and I feel we will be presented with a lot of wilted lettuce covered in salad dressing. The spin doctors will be out in full force trying to make a silk purse out of a sows ear. Take a peek at the Empire Manufaturing figures.

Ted FTuesday, January 19, 2016 at 9:59 am

China has been a disaster waiting to happen. You can only be a exporting economy for a certain period of time then it comes back to bite you you know where.

Finally, more and more of the candidates are beginning to talk about “Made In America”… This is a theme that will NOT go away as Americans are finally realizing that they have been duped by the International corporations (and the politicians they bought off) who could give a crap about the plight of the average American…. Want America to be successful again? Buy American made, from corporations really based in America and support candidates who want to return manufacturing and American companies to America….. We consume it and we should manufacture it!…..

girish v shahTuesday, January 19, 2016 at 10:55 am

the bear period for stocks given is completely false and totally misleading
i would advise readers to check(yahoo finance) before swallowing all the stats
i am writing after checking
of recent times the russell 2000 went down from may 2007 and ended in march 2009 a period of nearly 22 months bounce backs are not bull markets.

guiseppe marcoTuesday, January 19, 2016 at 11:57 am

Weiss Research has Larry Edelson touting China’s waiting potential and then Jon Markman touting its decline. And all Weiss Research does is bring on more analysts to offer more subscriptions for more fees. Want any opinion- one of the multitude of analysts have it.
I would prefer a service that has a few analysts with similar views working different methods on the market. That has gotten out of hand, too many divided segments so that it would take multiple subscriptions to give an adequate diversity.

MarkTuesday, January 19, 2016 at 2:41 pm

At an objective outlook. !!

RTTuesday, January 19, 2016 at 3:16 pm

I agree guiseppe, Weiss research has got to stop talking out of both sides of its mouth. If you can’t agree amongst yourselves whom are we to believe.

john eastmanTuesday, January 19, 2016 at 1:12 pm

Larry’s 31,000 probably will happen rapidly. As stocks are valued in Dollars. This brief period of a strong dollar will be fleeting. As the FED really starts up the presses the dollars will be worth toilet paper and stocks will be priced accordingly. In terms of gold Stocks will be at 1800-2500 if we are lucky.
charger john

Bruce HurstTuesday, January 19, 2016 at 7:48 pm

Interesting stats but for a parallel look no further than the 2008 figures. Those routs happened in quick succession, Sept/Oct/Nov. The figures before and after do not rate. Pre 2008 there was still strong confidence in the integrity of the market. After 2008, the whole scene was propped by massive QE. We have none of those factors in play at present with “trust” being the biggie. Hang on to your hats.

Looks like Weiss contributors will spin whatever story fits the current results ,regardless of the data previously presented>>

Keep it up lads its good fun/However I assume no fees ?

John

AllenFriday, January 22, 2016 at 5:32 am

Yes, conflicting data is worrisome. Good
assessments are priceless but, only go
so far. The only real guide post to all this
is: 1) What do the charts show now?
2) What is your objective?
3) What does your risk management
tell you about yourself?
4) Follow the money is used a lot as
they say…really it’s follow the flow of
credit and currency movements!

BeverlyFriday, January 22, 2016 at 3:25 pm

I found out inverse ETF’s are for short term traders because they are re-set from
week to week and do not make the money people think. Recommendation was
buy a normal ETF with twice (three X) the money and keep this longer and will
do better. What are your thoughts?
Thanks,
Beverly

RichardSunday, January 24, 2016 at 7:52 am

Beverly. I have found that inverse ETF’s work best long term.For example EXXI is a bull 3 ETF fund. As oil goes up so does this ETF. We know oil will come back up at some point and when it does,this fund will be up 200,300,400 percent easily.
Timing is always the unknown.